SALT LAKE CITY-Policyholder attorneys hope Lloyd's of London underwriters will clarify conflicting policy clauses for resolving coverage disputes now that a federal court has ordered the underwriters to resolve one dispute in a U.S. court.

Even if Lloyd's does not clarify the policy language, the decision shows other courts that the policy is subject to more than one reasonable interpretation, policyholder attorneys said. That smacks of ambiguous policy language, and many courts resolve disputes over unclear language in favor of policyholders, they noted.

A Salt Lake City federal court judge on May 6 barred a group of Lloyd's underwriters from sending a $3.7 million coverage dispute to England for arbitration, even though the policy at issue contains a mandatory arbitration clause. The court blocked the underwriters' efforts because the policy also includes a provision-known as the service-of-suit clause-that subjects Lloyd's underwriters to U.S. court jurisdiction if the underwriters fail to pay any amount that "the assured" claims it is owed.

Policyholder attorneys offer widely varying estimates on how often Lloyd's underwriters have used the two clauses together within different types of policies, including primary and excess general liability policies. They do agree that the likelihood of the provisions appearing together increases with policies written since the late 1980s.

The Salt Lake City case centered on the conflicting provisions included in a project cancellation policy that EER Systems Corp. of Vienna, Va., purchased from Lloyd's underwriters in 1993.

The policy provided almost $3.8 million of limits to cover some of EER's expenses if the U.S. space agency canceled a commercial satellite launch program, which EER was developing. The policy covered sums EER would owe sub-contractor Thiokol Corp. of Ogden, Utah, for its non-recurring costs to develop rocket motors for the project. Though EER purchased the coverage, Thiokol is the "named assured."

The National Aeronautics and Space Administration in 1994 canceled funding for the project after Congress trimmed NASA's budget that year.

Thiokol then sought nearly $3.7 million under the policy from Lloyd's.

The underwriters refused to indemnify Thiokol. They argued that the funding revocation did not mean the project had been canceled.

Thiokol sued for coverage. The underwriters sought a stay of the litigation so the dispute could be arbitrated in England. They argued that the service-of-suit clause was meant to aid policyholders in forcing underwriters to arbitrate disputes and enforce arbitrators' coverage awards.

U.S. District Court Judge Dee Benson cited three reasons why the service-of-suit clause supersedes the arbitration clause and Thiokol may press its suit:

Because the service-of-suit clause mentions "the assured," it is more specific than the arbitration clause and modifies that clause.

The 10th U.S. Circuit Court of Appeals, whose decisions apply to Utah cases, has ruled that ambiguous policy language must be construed in favor of policyholders.

In "harmonizing" conflicting policy provisions, the more reasonable interpretation is that Thiokol may sue Lloyd's in U.S. courts for coverage, while EER would be obligated to arbitrate any coverage dispute.

Lloyd's attorney Ethan Greenberg of Morgan, Lewis & Bockius L.L.P. in New York would not comment because the litigation is ongoing. But, other insurer attorneys said the ruling conflicts with the limited case law on this issue.

Insurer attorney Perry Kreidman, a partner with Wilson, Elser, Moskowitz, Edelman & Dicker in Washington, noted that some reinsurance contracts contain both provisions. When coverage disputes have arisen, the reinsurers have submitted to U.S. court jurisdiction. In most cases, courts, including the 2nd U.S. Circuit Court of Appeals, have ruled that coverage disputes should be arbitrated, he said.

But, courts tend to look at policyholder/insurer and insurer/reinsurer disputes differently, said policyholder attorney David Steuber, a partner with Troop Meisinger Steuber & Pasich L.L.P. in Los Angeles. Insurers are used to resolving disputes in arbitration settings in London, he said.

"It also goes to show that when it serves insurers' purposes to argue that the service-of-suit clause trumps the arbitration clause, they'll do so," observed policyholder attorney Mark F. Rosenberg, a partner with Sullivan & Cromwell of New York.

Thiokol would not allow its law firm, Anderson Kill & Olick P.C. of New York, to comment.

Attorneys were divided on whether the ruling would influence other courts.

Noting that Judge Benson pointed out the uniqueness of this case's facts, particularly the court's interpretation that Thiokol was not the policyholder even though it was the "named assured," the case likely will not influence other courts, said insurer attorney Dean Hansell, a partner with LeBoeuf, Lamb,f Greene & MacRae L.L.P. in Los Angeles.

Mr. Hansell and other attorneys, though, disagree with the court on that point. They say Thiokol is the policyholder, because it was the "assured."

Still, that distinction by Judge Benson gives courts an opportunity, if they want it, not to rely on the ruling, Mr. Rosenberg said.

He and other policyholder attorneys, though, said the case would influence other courts, because it shows reasonable minds can interpret the combined effect of the clauses differently.

"Once you get that first decision, it's easier to get the second, third and fourth courts to follow," Mr. Steuber said.

Policyholder attorneys hope the decision sends a message to Lloyd's. If the service-of-suit clause is meant only as an arbitration aid to policyholders, the clause should state that intention clearly, the attorneys said, echoing comments by Judge Benson.

Policyholder attorney William Greaney, a partner with Covington & Burling in Washington, said the underwriters' argument struck him as "an afterthought" to explain away their "mistake" of including both clauses in the policy. He noted that policyholders would not have to sue in U.S. courts to enforce the arbitration clause.

The underwriters' mistake was not guessing how the service-of-suit clause would be misinterpreted, said LeBoeuf's Mr. Hansell.

But, Judge Benson and some policyholder attorneys said a September 1971 letter from the Lloyd's Underwriters Non-Marine Assn. to the Lloyd's Insurance Brokers Committee raises questions about the underwriters' intentions. The letter, referring to a LeBoeuf letter to the Committee of Lloyd's, warns of potential market problems if Lloyd's underwriters weaken policyholders' rights under the service-of-suit clause and routinely complicate coverage litigation by trying to move the litigation to federal courts from state courts.

Policyholder attorneys say the letter shows the market traditionally used the service-of-suit clause to assure U.S. policyholders that they would not lose their rights to sue for coverage in U.S. courts. That was a valuable marketing tool for Lloyd's, the attorneys said.

"That's a very valuable piece of evidence," Mr. Steuber said.

Mr. Hansell said the letter is irrelevant because it does not deal with how the two disputed clauses in the EER policy would work in concert.

Even some policyholder attorneys are unsure how useful the letter will be in future cases.

Thiokol Corp. vs. Certain Underwriters at Lloyd's of London, U.S. District Court in Utah-Northern Division; No. 1: 96-CV-028 B.